How does this overpayment lark work?

Icey77

I'm about to sign a re-mortgage document with Alliance & Leicester and have been reading the paperwork and all the small print etc etc

I have got as far as the overpayments section and I'm a little confused! The paperwork says:

Overpayments of less than £500 - If you make a regular lump sum payment on your mortgage account, which is less than £500, the amount you owe, and so the interest you pay, is not recalulated immediately, but at the end of the month in which the overpayment is made.

Overpayments of more than £500 - If you make a capital payment that is, an overpayment of more than £500, the amount you owe, and so the interest you pay, is recalculated immediately. This provides you with the benefir immediately.

The annual bit I get, the monthly bit I don't

I don't think I can afford to make monthly overpayments and save money to make an annual overpayment - am I better off making the monthly overpayments or sticking what I would have overpaid into an ISA and saving it make an annual overpayment?

I will have £122k mortgage over 30 years

Any help is gratefully accepted!

homer_j_3

Hi

What it is saying is that is that they (A&L) will allow you to make overpayments. If the overpayment is £499.99 or less then they will not take this off your interest bearing balance immediately but at the end of the month.

If you can make an overpayment of £500 or more then the interest bearing balance gets reduced immediately and you will see the benefit before the end of the month.

I am not sure what annual bit you refer to but you are better making any overpayments of less than £500 on the last day of the month by the sounds of it and any payments of more than this you can do at any time.

Icey77

I understand the annual overpayment - I can make one lump sum payment in January of £500 or more that will immediately reduce the capital amount outstanding and thus also reduce the interest calculated on it.

I don't understand why I would want to make monthly overpayments which don't take effect until the end of the month, am I paying the interest early? Why does my overpayment not hit the capital debt at all?

At the moment I am leaning towards saving my overpayment amounts in an ISA and paying over in the January to make a lump sum payment against the capital debt because I understand it. I don't want to make overpayments and not understand how they are making any (if any!) difference.

Am I being really think here?

CLAPTON

There is some confusion here... your first post doesnot mention annual payments at all.

It mentions different treatment of monthly payment thats are 500 and more or less than 500.... did you mean something different????

homer_j_3

All it is saying is that if you want to overpay then you can do. If you pay less than £500 then you can and this will come off your current balance so:

£50000 mortgage and you will have 2 balances on the computer system at A&L

£50000 current balance and £50000 interest bearing balance. The interest bearing balance being the balance in which the computer calculates what interest you will be paying.

If you make an overpayment of £400 then your current balance would be £49600 and your interest bearing balance would be £50000 so the interest that is being charged would still be based on the £50000. However at the start of the following month the IBB will reduce to £49600 and interest will be calculated on this revised balance.

Now taking an overpayment of £500, both your current and IBB would reduce immediately to £49500 and interest would be recalculated straight away because of this.

Does that make sense?

Icey77

Got it now, apologies for my vague OP. The above £500 overpayment can be made annually only.

Thus, I can make monthly overpayments up to £499 and one annual overpayment (in addition to the monthly overpayments :rolleyes: I wish) of over £500.

I think I can feel a spreadsheet coming on

CLAPTON

so if you make an overpayment of 499 near the end of the month, they deduct this from the capital at the beginning of the next month so you only lose a couple of days........... seems reasonable to me